Sluggish expansion showed the weakness of the Indian economy
INDIA’S industrial output grew by a faster-than-expected 2.4 per cent in May, data showed on Thursday (July 12), but the still sluggish expansion underscored the weakness of Asia’s third-largest economy.
The 2.4 per cent increase from a year ago at India’s factories, mines and power plants eclipsed market forecasts of a 1.8 per cent rise and came after two months of shrinking growth.
But the rise, spurred by higher manufacturing and power output, was still well below the nearly 10 per cent growth in monthly output before India’s economy began losing traction in the second half of last year.
“Production is growing - but only slowly and well below potential,” said Glenn Levine, senior economist at Moody’s Analytics, blaming declining business confidence and investment linked to government policy paralysis.
“None of this is likely to turn around any time soon,” Levine added.
May’s official data came after a revised 0.9 per cent contraction in output the previous month and a 3.2 per cent shrinkage in March.
Among manufacturing goods, textile production rose 8.6 per cent but capital sector goods growth - a key signal of investment confidence - fell 7.7 per cent, underscoring reluctance by companies to spend on machinery in the face of weak domestic and export demand.
An aggressive string of interest rate hikes to curb stubborn inflation along with a stuttering world economy has undermined the once-booming economic giant.
The data came as the Asian Development Bank (ADB) cut its growth forecast for India, projecting 6.5 per cent expansion this year, down from a 7.0 per cent April forecast.
For “developing Asia”, the ADB lowered its growth forecast to 6.6 per cent this year from 6.9 per cent, citing the eurozone crisis, tepid US recovery and slowing Indian and Chinese expansion.
China’s economy would expand by 8.2 per cent this year, down from an earlier 8.5 per cent forecast, the ADB said.
India’s output figures come after Premier Dr Manmohan Singh, who has taken charge of the finance portfolio, said this month he would push to restore the economy’s “animal spirit”.
But analysts are skeptical Dr Singh will be able to implement much meaningful change due to disagreements in the ruling coalition over economic reforms.
The industrial output numbers could ease pressure on the central Reserve Bank of India (RBI) to cut interest rates to boost growth, analysts said.
With lingering inflationary pressures, “the case for a rate cut is not strong”, said HSBC chief India economist Leif Eskesen.
Inflation is currently running at more than 7.5 per cent and is expected to nudge higher in latest figures due out on Monday.(July 16)
The RBI, which holds its next monetary policy meeting on July 31, fears lower rates would fuel inflation due to India’s outdated infrastructure and other structural constraints.
India’s economy expanded 5.3 per cent between January and March, the slowest quarterly pace in nine years.
After growing for close to a decade at near double-digits, annual expansion could be returning to its previous five to six per cent levels, analysts say.
“It is ironic that India - which just a handful of years back had almost everything going for it and also handled the global financial crisis with aplomb - has become the sickest Asian economy,’ said CLSA economist Rajeev Malik.
Experts say India needs high-octane growth to pull its overwhelmingly poor 1.2-billion population out of poverty, but the government is unable to stimulate the economy due to a gaping fiscal deficit and strong pressure to cap spending.
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